Brexit ‘no deal’ risk spikes investors’ jitters

The UK’s failure, to date, to agree its exit from the EU is causing angst amongst investors either seeking to sell or acquire assets, warns Cushman & Wakefield.

The global real estate brokerage firm said baseline predictions suggest weak or negligible economic growth for several quarters in the event of a no-deal Brexit, with some forecasters predicting that the UK will enter into a recession. The wide variation in forecasts underlines the uncertainty in the market, Cushman added.

Elizabeth Troni, head of
EMEA Research and Insight at Cushman& Wakefield explains:

“Growing prospects of no
deal and a weaker economic outlook have continued to send equity markets lower,
with UK REITs falling more than the wider market. With the exception of logistics
and alternative sectors, most REITs trade as significant discounts to NAV.
Brexit and political uncertainties has led to gilt yields falling from 1.57% to
1.28% over the quarter.

“Five-year swaps also fell
over the quarter as prospects of a hard Brexit imply rates will remain lower
for longer. Whilst lower rates may benefit investors, the most recent Bank of
England credit conditions survey showed historic and forward-looking indicators
were sharply negative in Q4 2018 pointing to a reduction in the availability of
credit and expectation that levels of trading will remain weak in the near
term.”

Negative
sentiment has impacted inflows into funds. In the year following the vote to
leave a net £1.5bn was withdrawn from funds, according to the Investment
Association. Since then, less than a net £100m has been added. Whilst funds are
holding positive cash reserves, any spike in outflows could place pressure on funds
to sell.

Cushman
added that a gap between buyer and seller expectations on pricing has emerged amid
continued uncertainty, which is causing deals to take longer to close. Many
investors are unwilling to sell at lower prices and instead hold off from
bringing assets to the market, despite active demand. Pricing is expected to
stabilise with softening in some segments, according to Cushman, as activity is
expected to remain weak in the first half of 2019 with some upside if news flow
on Brexit improves.

Will Robson, global head of real
estate research at MSCI, said:

“Although
real estate investors have historically focused on their domestic markets,
investors are continuing their gradual shift away from this home bias. Many
real estate investors who have diversified globally are encountering
geopolitical risk, however: 2018 was a year of political discord in both
developed and emerging markets, with continued uncertainty in the UK arising
from the Brexit referendum, the nationwide protest movement in France, the
longest government shutdown in U.S. history and ongoing U.S.-China trade
tensions.

“The increasingly international nature of real estate capital markets means that investors may not be able to escape these global risks. Global Gateway Cities are particularly exposed to such capital flows. In this context, we anticipate that political uncertainty will likely remain a top risk for real estate investors in 2019.”